Loan to Foreign Holding Company by its Indian Subsidary
This query is : Resolved
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24 June 2025
Dear All,
I would like to know whether an Indian subsidary company can give loan to its Foreign Holding Company? Are there any restrictions or procedures to be followed as per Companies Act, 2013 , FEMA & RBI regulations?
I would like to know whether an Indian subsidary company can give loan to its Foreign Holding Company? Are there any restrictions or procedures to be followed as per Companies Act, 2013 , FEMA & RBI regulations?
12 August 2025
1. Companies Act, 2013
Section 185 of Companies Act restricts companies from giving loans to directors or to entities in which directors are interested.
However, loan to holding company (foreign or domestic) by a subsidiary is also restricted under Section 185 unless certain conditions are met:
The loan should be approved by special resolution of shareholders.
The loan should be for the principal business activity of the company.
The company giving the loan should meet solvency and liquidity tests.
Also, Section 186 governs loans and investments by companies.
The company must comply with limits on loans and investments under this section.
Approval by Board of Directors and sometimes shareholders is needed.
2. FEMA (Foreign Exchange Management Act) & RBI Regulations
Loan by an Indian company to its foreign holding company is considered Outbound Direct Investment (ODI).
As per FEMA, such transactions require RBI approval or compliance under the Automatic Route if conditions are met.
Key RBI guidelines:
Indian company must be eligible to make outbound investment under ODI rules.
The foreign holding company should be a genuine business entity.
Proper due diligence and valuation should be done.
Reporting of the transaction to RBI through Form ODI (FEM (ODI) Regulations) is mandatory.
Loan terms (interest rate, tenure) should be arm’s length and comply with transfer pricing norms.
3. Procedures to be followed
Step Description
Board Approval Approval of the Board of Directors of Indian subsidiary
Shareholder Approval Special resolution if required under Companies Act
Compliance with Section 186 Ensure limits and conditions under Companies Act
RBI Approval / ODI Compliance File Form ODI and get necessary approvals or comply with automatic route
Transfer Pricing Compliance Ensure interest rates and terms are at arm’s length
Documentation & Reporting Maintain proper agreements and report to RBI & MCA
Section 185 of Companies Act restricts companies from giving loans to directors or to entities in which directors are interested.
However, loan to holding company (foreign or domestic) by a subsidiary is also restricted under Section 185 unless certain conditions are met:
The loan should be approved by special resolution of shareholders.
The loan should be for the principal business activity of the company.
The company giving the loan should meet solvency and liquidity tests.
Also, Section 186 governs loans and investments by companies.
The company must comply with limits on loans and investments under this section.
Approval by Board of Directors and sometimes shareholders is needed.
2. FEMA (Foreign Exchange Management Act) & RBI Regulations
Loan by an Indian company to its foreign holding company is considered Outbound Direct Investment (ODI).
As per FEMA, such transactions require RBI approval or compliance under the Automatic Route if conditions are met.
Key RBI guidelines:
Indian company must be eligible to make outbound investment under ODI rules.
The foreign holding company should be a genuine business entity.
Proper due diligence and valuation should be done.
Reporting of the transaction to RBI through Form ODI (FEM (ODI) Regulations) is mandatory.
Loan terms (interest rate, tenure) should be arm’s length and comply with transfer pricing norms.
3. Procedures to be followed
Step Description
Board Approval Approval of the Board of Directors of Indian subsidiary
Shareholder Approval Special resolution if required under Companies Act
Compliance with Section 186 Ensure limits and conditions under Companies Act
RBI Approval / ODI Compliance File Form ODI and get necessary approvals or comply with automatic route
Transfer Pricing Compliance Ensure interest rates and terms are at arm’s length
Documentation & Reporting Maintain proper agreements and report to RBI & MCA
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13 August 2025
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